Succumbing to cloud rivals, Rackspace goes private in an acquisition
Cloud computing company Rackspace has announced that it has entered into a $4.3 billion cash deal with Apollo Global Management to become a private company. According to Apollo, it would acquire Rackspace for $32 per each share in cash. That would be a 38% premium to the cloud company's closing price on 3 Aug'16 and 6% above its stock closing price on 25 Aug'16.
Rackspace is a Texas-based managed cloud computing company with its offices in the US, the UK, Switzerland, Israel, India, Netherlands, Hong Kong, and Australia. Richard Yoo founded the company along with Dirk Elmendorf and Patrick Condon in 1998; as of Dec'15, the company had 6,189 employees. It provides cloud services allowing its customers to use remote servers for storing data and computing power.
Ten years after its establishment, Rackspace went public in 2008 and remained a highly growing company for several years. It mostly benefited from the early shift by businesses to run work software on hired computer servers on the Internet rather than their data centers. In 2013, with the rise of Amazon Web Services, the online retailer's cloud business, Rackspace's growth came to a halt.
In 2013, AWS cut cloud offering prices seven times; Rackspace's shares plummeted as AWS' soared high. In 2014, Rackspace hired Morgan Stanley seeking strategic options, including a partnership with other tech companies. Google was also competing with AWS and slashed its cloud-computing prices by 85% in Mar'14. The AWS-Google price war continued (continues today) while smaller players like Rackspace struggled to match low prices.
Rackspace President & CEO Taylor Rhodes stated, "We are presented with a significant opportunity today as mainstream companies move their computing out of corporate data centers and into multi-cloud models."
The Apollo-Rackspace deal is, however, subject to antitrust regulatory approval in the US, the European Union, and Israel. Rackspace's board has unanimously approved the deal, which is expected to be closed in the last quarter of 2016. Rackspace's shares jumped almost 4% to reach $31.5 in pre-market trading. The deal is being financed by Citigroup, Barclays, Deutsche Bank and Royal Bank of Canada.
David Sambur, Partner at Apollo Global Management, stated, "We have great respect for the company's (Rackspace) talented employees and their commitment to deliver expertise and exceptional service for the world's leading cloud platforms."
Under the contract, the funds managed by Searchlight Capital Partners would make an equity investment in the acquired company. Rackspace's board of directors having unanimously approved the deal recommended the stockholders vote in favor of the transaction. The board considered several options, including continuing as a public trading firm, before going private. This year, the price of Rackspace's stock jumped, up over 24%.